Russia’s biggest independent oil producer Lukoil has lodged arbitration in London against China’s Sinopec. The Chinese company backed out of a $1.2 billion deal to buy 50 percent of Caspian Investment Resources which has oil and gas assets in Kazakhstan.

The company signed an
agreement to sell its part of Kazakhstan affiliate Caspian
Investment Resources Ltd to China’s Sinopec in April 2014.The transaction was then
valued at $1.2 billion but could be adjusted at the date of
completion.

"Sinopec has refused
to finalize the deal, which is considered a breach of contract by
Lukoil. Lukoil started arbitration proceedings against Sinopec
regarding the significant damage inflicted,” the Russian
company said in a statement.

Sinopec purchased the other 50 percent stake in Caspian
Investment Resources from Indian billionaire Lakhshmi Mittal in
2010. Sinopec is Asia’s biggest refiner, and would have 100
percent control of the company as a result of the deal. Caspian
Investment Resources Ltd has stakes in four hydrocarbon
production projects in Kazakhstan.

“Sinopec’s refusal to honor the deal is likely due to the
falling oil price, which has halved since April 2014. The price
of $1.2 billion for the asset no longer seems so attractive,
although at the time it was below the level of transactions in
the Russian oil and gas sector,” Andrey Polishchuk, analyst
from Raiffeisen Bank was cited by Vedomosti as saying.

Lukoil planned to use the funds from the transaction for
exploration projects, including those in the Kazakh sector of the
Caspian Sea. The company has already reported a $358 million loss
in the first quarter of 2014 on the disposal of its 50 percent
stake in Caspian Investment Resources Ltd. to Sinopec.

“Obviously, the decline in oil prices has changed the value
of the asset. Sinopec could refer to the fact that this is a
significant change in the circumstances of the transaction, and
thus abandon it,” corporate lawyer Anton Panchekov from
Goltsblat BLP told Vedomosti. Lukoil could consider the
difference between the current price of the asset and the price
the parties agreed in April as a loss, he added.